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Seeking a Happy Clearing Relationship

To find the right fit between clearing firm and broker-dealer, consider these factors

Illustration by Matthew Hollister

To find a clearing relationship destined to click, broker-dealers must learn what makes each candidate tick. Easier said than done. Indeed, choosing the right clearing firm requires time, lots of due diligence, a finely tuned set of priorities and an eye to the future.

“It’s more than just a phone call: ‘Here’s a list of our assets—what can you guys charge us?’” says Robb Combs, director of correspondent clearing at Raymond James & Associates inSt. Petersburg,Fla.

Whether you’re a new BD just setting up or a firm seeking to change clearing partners, the idea is to think at least five years out since contracts are usually long-term.

“This is a little like getting married: It’s for the long haul, and you should be very thoughtful about it,” says Sanjiv Mirchandani, president of National Financial, a Fidelity Investments company and, with more than 260 BD clients, the industry’s second-largest clearer.

The clearing firm should be financially stable, boast a strong balance sheet and be deeply commitment to the clearing business. Further, clearer and BD should have shared values and a similar culture.

Another consideration is partnering with a clearer that is a unit of a brokerage firm and thus highly familiar with the brokerage business and advisor needs. In that scenario, the same products and services provided to its FAs are likely to be available to clearing clients. “Such firms will take a full 360-degree view of the business today, where it’s going and what is necessary to support it,” says Craig Gordon, director of RBC Correspondent and Advisor Services, inMinneapolis, which has 175 clients.

Price per trade is important, of course; but it is not No.1 on the list simply because most clearers are competitive and have comparable pricing.

“If your selection is based on pricing, it’s not going to be the best fit. It should be way down on the list—probably No. 5 or No. 6, or even deeper,” says Jim Crowley, chief relationship officer of Pershing, based in Jersey City, N.J. With 1,500 clients, the BNY Mellon affiliate is the biggest clearing firm.

A premier clearing partner has a great deal to offer beyond clearing. “In this day and age, it’s critically important for a brokerage to determine whether or not the clearing firm truly understands their business through their eyes, as opposed to simply providing a service. You need to go past vendor-processor into a partnership and growth-oriented relationship,” notes William Coppel, managing director and chief growth officer of First Clearing, a St. Louis-based affiliate of Wells Fargo. First Clearing’s clients number 88.

Outside of current capabilities, BDs need to get a good fix on what the clearing firm will be able to provide down the road. For instance, what if a BD’s business model changes?

“If the clearing firm has just one selection of services for one type of broker-dealer, you may have to look for another partner” says Combs, whose firm has 42 clients. “You need a clearing firm that understands many different types of business models and can adapt to whatever might be needed in the future.”

Typically, BDs submit to clearers a request for information (RFI), or taking it a step farther, a request for proposal (RFP) based on their specific needs. A consultant might be hired to help with this process.

RFPs ask pointed questions, like: What’s your pricing? How do we integrate with your technology? How will you move our assets from one custodian to another? What kinds of products and services do you provide? Do you have fee-based programs? Financial planning tools? And then there are many more detailed questions concerning each of these aspects.

However, joining up with a clearer isn’t based on a one-sided evaluation. “Clearing firms have become very selective in the firms they’re doing business with,” Gordon notes. “They represent revenue opportunities, but they also represent risks. Both sides are evaluating each other to see if it’s the right fit.”

Between the Lines

In assessing firms—and typically the choice will quickly narrow down from about four or five to two—it’s critical to consider issues that are not on the “scorecard.”

“You need to read between the lines and consider things that don’t come through on a spreadsheet,”Crowleysays. “Really get a feel for what the people who run the clearing firm are like.”

That means taking the time for a face-to-face visit.

“This is very important,” says Mirchandani, who is based inBoston. “A picture is worth a thousand words—and a visit is worth a thousand PowerPoint presentations. Learn about the culture of the firm and the quality of the people who will be managing your relationship.”

Adds Combs: “You really need to understand who you’re working with—not just about the facility and location but who the management team is, who will be helping you and who at the [top of the] firm is really steering the ship.”

A conscientious clearing firm will create a business plan with the BD to ensure that the clearer is aligned with the brokerage’s goals and objectives “versus just having the firm plug into the standard offerings,” Coppel notes.

There’s no question that nowadays risk management is a heightened issue for BDs: general business risk, credit risk, operational risk, regulatory risk, compliance risk, reputational risk. How the clearing firm will help the brokerage manage risk is therefore critical.

“Start by looking at how the firm manages its own risk,” Coppel says. “Second, determine how liberal it would be with its resources to support your firm’s risk-management agenda.”

Risk-management tools to monitor the BD’s business are only part of the picture.

“If a smaller broker-dealer with a limited amount of net capital makes a mistake, it could cost them their business,” Combs notes. “It’s about helping them understand their business and what the potential downfall can be, then helping them with an active planning process.”

Does the clearing firm have other clients like you—or not?

“That’s a very clear indication as to whether it’s a good fit with your principles and values, and what you’re trying to do strategically,” Crowley notes.

For growth-focused BDs, consider the extent of the clearing firm’s financial resources that would help implement future strategies. This includes recruiting and training advisors, and introducing new platforms, such as managed investments.

“If a broker-dealer is planning to grow its business over time and recruit advisors from wirehouses,” Gordon notes, “they’re going to need the capabilities that those advisors have at the larger enterprises. That means aligning with a partner that has a comprehensive suite of capabilities in order to attract those advisors.”

Scale matters, according toCrowley. “If a clearing firm can bring scale to a particular service, they can deliver it more efficiently to the broker-dealer. It’s not just scale in execution, clearing and custody. It’s scale in the peripheral things,” such as offering a wide choice of third-party technology providers or the ability to deliver trade surveillance and sales practice surveillance technologies.

Size is a key factor, Mirchani says. “The size of the platform is important because that translates into the ability to provide technology and competitive pricing.”

The best clearing firms consistently introduce innovative and improved products and services. For instance, RBC has a low-cost managed account solution, with the firm’s own research group managing the portfolios. Later this year, Pershing will launch a new client portal with opportunities for customization. And National Financial is working on a state-of-the-art alternative investment platform that it expects to introduce by year’s end.

Service Industry

The clearing firm’s ability to build and customize product to fit BDs’ specific needs is another key element in this decision-making process.

“It’s not just about offering a full menu of tools and systems,” Combs says. “It’s: Can you customize them? And once you customize them, how do you integrate them into [the BD’s] operations? Do you help them? An additional level of service is what you should be looking for.”

To that point, Mirchandani stresses: “The No. 1 pitfall in choosing a clearing firm is not paying enough attention to the importance of service. A commitment to service is what drives satisfaction. It’s a very common pitfall to just look at price and technology and say, ‘Okay, that’s all we need to know’.”

Placing too much emphasis on price is certainly misguided. “I’ve seen lots of firms make decisions that are penny-wise and pound-foolish,” Gordon says. “If you base your decision around pricing and that leads you to providers that offer less service, fewer resources and less growth support, it might solve a need today; but when you go to grow your business in the future, you’ll encounter problems.”

Neglecting the way a change in clearers will have an impact on advisors and their clients is another place where BDs trip up.

“Broker-dealers think about it only from a middle office or home office perspective and not how the branch will be affected,”Crowleysays. “But all the dimensions of the relationship need to be considered.”

Over many years, the chief mistake Gordon has seen is that BDs “focus on solving problems they had in the past without giving enough attention to making sure they’re not creating new problems for the future.”

In evaluating clearers, Mirchandani underscores: “It’s not just about the present. It’s about who is committed to getting to the future in the most efficient way.”